Single-member LLCs are what they sound like: an entity with one owner. This type of business structure differs from others because it does not have members beyond the owner, as opposed to other entities such as partnerships or corporations.
You can set up a single-member LLC in any state, but you should consider certain factors and regulations before proceeding.
These include what form your business will take (limited liability company), what tax status you would like for your entity, and more.
This blog post will cover everything you need to know about what a single-member LLC is so that you can make an informed decision if you're thinking about setting up your LLC.
What Is Considered a Single-Member LLC?
A single-member LLC is an LLC with only one member.
These types of companies are what you want to set up if there's just one person (or business entity) that will be the company.
This sole proprietorship also has some special considerations as well, which we'll go over in more detail below. Some people mistakenly call these companies a "member company" or an "owner's corporation."
However, what these people are talking about is what's called a single-member LP (limited partnership).
The difference between what's called a "single-member LP" and what's called a "single-member LLC" is that an LLC has two types of members:
those who can control the company, like managers or directors; and those with a financial stake in the company, what's called the "members." When an LLC has more than one member, they're considered a partnership.
Who Should Choose a Single-Member LLC?
Anyone who wants to start a company on their own should choose what's called a single-person LLC.
This type of limited liability company is simple for one person to manage and operate, so it's perfect if you're the only owner/manager in your business.
It also makes sense from an accounting perspective: all profits or losses will be attributed to you.
Small business owners who want a company that's easy to maintain and operate should also choose a single-member LLC.
This type of business is more likely to function without any disputes because you won't have anyone else who can disagree with the decisions you make on how your company operates, like in what markets it enters or what products it sells.
The Advantages of Single-Member LLCs
A single-member LLC is a disregarded entity for federal income tax purposes.
This type of LLC is treated like what would be considered an individual for income taxes, so you won't have to pay any special considerations when it comes to reporting your company's profit or loss on your personal tax return.
Another advantage is that you'll be able to deduct what is called "pass-through deductions," like office supplies, hotel accommodations, and advertising expenses.
The Disadvantages of Single-Member LLCs
One disadvantage of a single-member LLC is that they don't have the same liability protection as other business entities.
In case your company is sued, all of its assets are at risk of being confiscated since it's a disregarded entity.
An additional downside is it may not offer the same level of asset protection as other business entities, such as a corporation or limited partnership.
Although they don't have to pay state income tax, SMLLCs also have to pay formation fees, and depending on the state, they also have to pay a franchise tax.
Single-member LLCs have to take precautions to avoid commingling business and personal assets. Commingling assets could lead to the company being disregarded by the court, and as a result, your limited liability will be lost.
This is called piercing "the corporate veil" and can result in severe loss of limited liability.
How Are Single-Member LLCs Taxed?
Internal Revenue Service (IRS) rules require a single-member LLC to report its income and losses on a Schedule C (Form 1040).
Single-person LLCs are not required to pay taxes (federal income tax) or report independently.
Self-employment tax is also due for the owner of a single-member LLC.
Self-employment taxes are what make SMLLCs different from other business entities, such as corporations and limited partnerships.
Single-Member LLC vs. Sole Proprietorship Business
A sole proprietorship is a separate business entity that doesn't have any associates.
It is the simplest business structure to establish and operate, but it has fewer income tax advantages than a corporation or partnership with more than one owner.
A sole proprietorship can be owned by a single individual who does not need to register it as an entity separate from him/herself at the state level (and in some cases, at the federal level, depending on what type of business it is).
A single-person LLC has one owner and can be taxed as a sole proprietorship for income tax purposes.
Unlike sole proprietorship, single-person LLC owners can choose whether they want their business income to be taxed as a C corporation or S corporation due to their disregarded entity nature.
Provided that an SMLLC owner specifies it in the operating agreement, an SMLLC can continue to operate even in the case of the death of the only LLC owner. Sole proprietorship can't do this.
Single-Member LLC vs. Multi-Member LLC
A single-member LLC is what it sounds like: an LLC with only one owner (member). Multi-member LLCs have two or more owners.
An SMLLC owner could be a sole proprietor or someone who wants to own property and protect themselves from liability without getting involved in the legal end of things.
A multi-member LLC has two or more members.
These might include two part-owners who want to share in the liability and profits, a group of friends who are equally invested in the company, or a family who wants to invest together for protection.
When paying federal income tax, multi-member LLC files taxes as a partnership.
Unlike SMLLCs, MMLLCs have to specify in their articles of organization whether the company will be manager-managed or member-managed.
Single-Member LLC vs. Corporation
An SMLLC is a form of a Limited Liability Company. A corporation, on the other hand, is what most people think of when they hear the term "company."
A corporation is a separate legal entity owned by shareholders.
Shareholders control and manage what happens in the company but are not responsible for its liabilities. Instead, the liability falls on those who have shares in the company's stock or bondholders if it has issued bonds.
The business owner of an SMLCC can choose to be taxed as an S or C corporation, meaning they need not pay self-employment tax.
However, the formation costs for a corporation are higher than those required for an LLC. Additionally, there are greater state requirements and procedures to fulfill when forming a corporation (federal and state taxes, filing fees, etc.).
Does a Single-Member LLC Need Its Business Bank Account?
An SMLLC is not required by law to have its own business bank account but is highly advisable to have one.
All money that comes in for your goods and services should go into the business account and only be used to fund the company.
Similarly, you should avoid using a personal bank account for any company expenses.
If this doesn't happen, any legal issues with your company can reflect on your personal assets and vice versa.
Can a Single-Member LLC Have Employees?
A single-person LLC can have employees, but it needs to obtain an employer identification number (EIN). This number will be used on tax returns for payroll taxes and other forms you file with IRS.
Does a Single-Member LLC Need Articles of Organization?
A single-person LLC needs articles of organization in order to operate legally.
To create a single-person LLC, you will file the company's articles of organization with your state's filing fee.
The certificate of formation is mailed to you and will contain important information about your original business structure that needs to be included on other forms.
Does Single-Member LLC Need an Operating Agreement?
A single-member LLC does not need an operating agreement, but it is highly advisable to have one.
Although it's optional, and you don't have to file it with the state, an operating agreement is important because it can be used to decide what should happen if the company is dissolved or there are other issues about its management.
Therefore, an operating agreement can help you avoid disputes and problems in the future.
Does a Single-Member LLC Need an Ein?
The IRS doesn't require a single-member LLC to have an EIN. You only need one if you plan on hiring employees, holding property in multiple states, or what type of business entity will be taxed as to what kind of corporation.
If the information listed above does not apply to your company, then an EIN isn't necessary.
Do Single-Member Llcs File Tax Returns?
Single-member LLCs are not required to file federal tax returns because they are treated as disregarded entities by the IRS.
As the sole owner of your limited liability company, you are responsible for reporting all profits and losses on Schedule C.
You will then submit it to your 1040 personal tax return. There is no need to file additional paperwork with local authorities outside of your state.
See our guide on what you need to do to start your LLC.
A single-member LLC is what you need if you want to protect your personal assets.
When it comes to liability protection, a single-member LLC can offer the same coverage as other types of business entities.
If this sounds interesting to you, consider what type of personal liability protection will work best for your business and what kind of asset protection works best.